Crisis In The Eurozone

Figures from Germany have indicated that the German economy contracted by 0.2% in the first quarter of 2003, and it is appearing as though Germany is plunging towards a full recession.

Germany represents the core of the Eurozone economy, and economists are scrambling to reassess the economic health of the EU in the wake of this bad news. Growth for the eurozone, which was expected to be around 0.5%, will likely have to be adjusted downwards.

Unfortunately for Germany, the economic situation is dire. The German labor system is plagued with strikes, taxes are at stiflingly high levels, and Germany can no longer balance its budget, and will begin exceeding the Maastricht Treaty’s 3% debt ceiling. Finance Minister Hans Eichel had this to say about the situation:

"We won’t make it in 2006 unless there is an economic miracle," he told Der Spiegel magazine yesterday, calling the admission "a bitter defeat". He blamed a bloated welfare state, soaring unemployment and deteriorating public finances.

This is exactly why a European-style welfare state is such a inadvisable thing. Sooner or later the costs will catch up with you, as is happening now in Germany. The German labor market is ossified by regulation, so that is virtually impossible to hire and fire workers. This raises unemployment because companies know that if they hire during boom cycles, they cannot fire during downward cycles. Couple this with declining productivity as workers demand more and more time off, and a system of social welfare programs that divert huge amounts of money from productive areas of society to unproductive ones, and disaster is virtually assured. If Germany is to pull out of this spiral they must reduce spending, cut taxes, and reduce regulation. Unfortunately for Germany, that may be politically suicidal, and the only way these needed reforms will pass is when the situation becomes so bad that there is no other way.

4 thoughts on “Crisis In The Eurozone

  1. Hell, in a decade or two we’ll be in as much trouble- our welfare state is crumbling as well, on top of our continually-growing national debt (6.4 Trillion and growing even larger as taxes are lowered, defense appropriations mount, and the economy continues to stagnate). The entire developed world is a ticking economic timebomb, from Europe and Canada to the US and Japan. Hopefully somebody will step forward who can make the hard decisions that need to be made, but I don’t see that kind of leadership stepping forward from the mainstream of either party any time soon.

  2. The US economy, while not good, is not nearly in as bad a shape as the German economy, mainly because our labor market is more fluid. Companies may shed workers in rough spots, but they also then have the ability to pick more up during periods of growth. Nor is our social welfare system anywhere nearly as expansive as Germany’s. While we need to reform programs such as Social Security, they’re not yet at the point where they’re reaching critical either.

    As for the quality of life issue, the quality of life for Americans is exceedingly good for a country with our population and diversity. While Europe claims a higher quality of life on paper, that’s largely due to a relatively small and homogenous population. As immigration and economic stagnation take their toll, the quality of life in Europe has been declining, while in the US it is holding steady or rising. A fluid and free market economy generates the best quality of life by allowing for access to services that a socialist economy does not have – as well as allowing for more opportunities for individual choice and investment. As Europe is finding out, the supposed "third way" between socialism and capitalism is as unsustainable in the long run as socialism itself.

  3. No matter how many times you cheerlead for unregulated free-market economies being the recipe for upward mobility of quality-of-life, two centuries of economic history that scream otherwise nullify your premise. One would think that fact that 200 years of attempts to make a free-market economy work without a single lasting success story on the planet, save for world leaders like Luxembourg and the Cayman Islands, would make you question your own credibility just a little, but I guess ignorance really is bliss.

    As for the prospects of the European economy being worse than the American economy, Bush and those spendthrifts in the GOP Congress are trying their damndest to accelerate the pace of our meltdown to meet theirs by passing another round of budget-busting tax cuts. As we continue to raise our record deficits more and more and more, we’re probably gonna destroy ourselves sooner than Europe does.

  4. Yes, free-market systems have been an utter failure, except for the United States, Great Britain, Germany, Hong Kong, Singapore, Maylasia, Taiwan, Estonia, Latvia, Lithuiana, the Czech Republic, etc, etc…

    The last 200 years have tought a clear lesson: the free market works.

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